THE CENTRAL ECONOMIC FALLACY OF KEYNES AND OUR POLITICIANS

I have been slow to catch on to this, but there is an incredibly misleading view about that any government spending is a stimulant. In an press conference early in his administration, Mr. Obama thought this so obvious that an expression of doubt or a contrary view merited a presidential “Duh!!”. Well, after seeing the non-results of trillions in stimulus and other government spending under Bush II and even more under Obama, I am afraid the “Duh!!” moment is on Mr. Obama and his friends (and on George W. Bush and his friends who thought and acted similarly). And on the science of economics and those prominent economists who have been teaching and pushing this view for so long. We have been in incredibly incompetent hands, in this area, since at least 2001. The New Zealanders, who hold a different view, are right. Here’s why.

The view might hold water if the government were spending from an accumulated surplus which it had been holding in a mattress somewhere. However, the view holds absolutely no water if the money spent is newly borrowed–as all or most of our “stimulus” and other deficit spending has been. Why? Because in the step of borrowing, an equal amount of money is removed from the world and US economy before being put back in. Neither Obama and crew (nor Bush and crew before them) can rationally claim that this removal of funds is not antistimulative –TO EXACTLY THE SAME EXTENT THAT MERE SPENDING IS CONCEIVED OF AS STIMULATIVE. $X in, $X out. Net result: zero.

If there were no transaction costs in the borrowing, the antistimulative effect of the borrowing exactly counterbalances the supposed stimulative effect of mere spending. If you take a cup of water out of one end of a swimming pool and pour it in at the other end, you will never make the pool overflow.